“At least 40% of all businesses will die in the next 10 years… if they don’t figure out how to change their entire company to accommodate new technologies.”
— John Chambers, Cisco System
John Chambers, the former executive chairman and CEO of cisco systems was quoted saying the above statement post-summer of 2019. The aforementioned quote has a profound impact on w.r.t supply chains because of the role they play in deciding the competitiveness of a business. Not long ago, supply chain management was away from the spotlight, regarded as a mere part of business meant to deliver the products to customers. With a growing population, the demand for different products grew steadily and supply chains became the forefront of competition. From sourcing to distribution, managing the supply chain of your business efficiently became as important as R&D or any other business function. For the longest of time, supply chain as a business function has not seen enough innovation, at least not as much as other business functions such as production, finance, marketing, and R&D.
This is the first, amongst a series of articles on digital transformation. This article focuses on understanding what is digital transformation, the various myths surrounding the nomenclature, and also the difficulties and realities in the implementation of digital transformation tools in supply chains.
What is digital transformation in supply chain?
Source: Foch consulting
Digital transformation is the process of using digital technologies to create new or modify existing business processes, culture, and customer experiences to meet changing business and market requirements. Digital transformation in supply chain is the extension of the aforementioned definition to supply chain specific processes and business functions. In practice, digital transformation is dependent on the maturity of novel technologies. A recent McKinsey study found that the average supply chain has a digitization level of 43%, the lowest of the business functions that were examined. Only 2% of the surveyed executives said that the supply chain is the focus of digital strategies. From the numerous conversations that I have had with experienced professionals in supply chains, the maturity and transformation of supply chains digitally are still not where it has to be. This is alarming especially when the benefits are proven and there for everyone to be seen. The same McKinsey study reveals that the digitization of supply chains shows a boost in annual growth of earnings by 3.2%(pre-tax) and annual revenue growth by 2.3%. It is far more impressive when seen that this is the largest increase seen amongst digitization of any business area.
Before going into the digital transformation of supply chains, do we understand the difference between the terms, digitisation, digitalisation, and digital transformation?
Digitisation– is the move from analog to digital. The classical replacement of paper-based business processes to tablet based checklists is the best example of digitisation in businesses. But the restriction or a characteristic associated with such digitisation projects is that the processes still follow the classical processes. Innovation of processes do not happen to replace the analog methods in digitisation projects.
Digitalisation– is the process of using digital data to optimize the existing working procedures. Digitalisation does not change the usual practice of business or create new business streams. It’s a continuous improvement process that uses the data evidences to support optimization of present ways of working. For example, let’s say the purchase orders for an inbound shipment is collected by scanning barcodes. The information is then stored into a warehouse management system(WMS) that allows the next person to track or retrieve details of the order by simply logging in the order number into the WMS. Contrary to a pre-digitalised way of working in which orders were processed by paper-based checklists. This is different from digitisation as in this case, the checklists have been entirely replaced by cloud-based database.
Digital transformation– is the systemic change of businesses where companies take a step back and revisit everything, from internal systems to customer interactions both online and in person. Performing digital transformation of your business involves asking What is our technology really capable of, and how can we adapt our business and processes to make the most of our technology investments. It does not entail asking how much faster we can do things the same way. Cultural changes drive the success of digital transformation projects and given the number of variables involved across many functions in supply chain, driving digital transformation of supply chains has been deemed difficult.
Why haven’t enough supply chains been digitally transformed?
The low rate of supply chain digitization could be attributed towards the technological maturity and the user expertise on technology. Its interesting to see that supply chain was one of the business functions to pioneer innovation, considering that ERP applications tailor made and readily made available for ERP solutions in supply chain management.
The Eye in supply chain(Source: DC Velocity)
The problem with software applications and technological innovations is that they do not take the variables involved in supply chain into account. The kind of data you retrieve from a supplier may not necessarily be the same as the warehouse data source. The disparity between data quality across different business functions makes it difficult to have one fit for all software/technology that can truly add value to supply chain functions. There haven’t been enough companies that have focused on capturing the information blackholes which hinders visibility and induces unforeseen variations in supply chains. The challenge since the turn of the century has been until today to capture these information blackholes and make systemic changes rather than plugging in technological tools to solve these problems.
For example, let’s say that the visibility of the future of customer demand is an issue for a company. Now if the project owner decides to commission a demand forecasting project using novel technologies such as ML and AI without understanding the root cause of the problem which could be caused collaboration and communication issues. These systemic problems will come back to haunt the business as collaboration and communication problems affect data quality. The demand forecasting project implemented will ultimately fail and not provide the expected payback period within two years.
Filling information blackholes and weighing in causality rather than correlation will go a long way in building the robust capabilities of a supply chain, on implementation of novel technologies. The success of digital transformation projects is driven by the pillars of digital transformation that steady these projects and these projects can be sped up by the agents of digital transformation. The next article addresses the agents and pillars in digital transformation of supply chains! Make sure to follow the next article on reading this one!
Web Content Manager at SupplyTech Insights